Democrats add stock buyback tax, scrap carried interest to win Sinema over

Democrats are including a tax on stock buybacks to make up for the revenue lost in their climate change package to win over Sen. Kyrsten Sinema (D-Ariz.), whose vote is a necessity to advance a centerpiece of President Biden’s economic agenda.

Senate Majority Leader Charles Schumer (DN.Y.) said Friday that the buyback tax will raise $74 billion, more than making up for the loss of a $14 billion tax on carried interest and a $55 billion tax on depreciation costs that were mandated by Sinema .

“I strongly believe in [closing] the carried interest loophole. I have voted for it. I pushed for it, I pushed for it to be in this bill. Sen. Sinema said she would not vote for the bill, not even move to proceed, unless we took it out. So we have no choice,” Schumer said.

Still, Schumer expressed confidence that all Democrats would support the stock buyback tax and noted that it’s particularly popular with progressive lawmakers.

“I hate stock buybacks,” Schumer added. “I think they are one of the most self-serving things that corporate America does. Instead of investing in workers and in training and in research and in equipment, they don’t do a thing to make their company better and they artificially raise the stock price by just reducing the number of shares. They’re despicable. I’d like to abolish them.”

The concessions to Sinema were tax breaks favored by the private equity industry and the US manufacturing sector.

Democrats needed to ensure that they could replace that tax revenue to fund their green energy and health care policies and significantly reduce the federal deficit, a key priority for centrist Sen. Joe Manchin (DW.Va.), who privately negotiated the initial deal with Schumer.

“We have agreed to remove the interest tax provision, protect advanced manufacturing, and boost our clean energy economy in the Senate’s budget reconciliation legislation. Subject to the Parliamentarian’s review, I’ll move forward,” Sinema said in a statement Thursday evening.

Carried interest is a way that hedge fund and private equity fund managers get paid for managing investments on behalf of their investors. It is taxed at a preferential rate of 23.8 percent — well below the top tax rate of 37 percent — and this has long been criticized as an unfair perk for the rich.

Executives at investment firms KKR, Goldman Sachs, Apollo Global Management and the Carlyle Group make up several of Sinema’s top campaign donors, according to nonpartisan research group OpenSecrets.

Some of Sinema’s aides have landed on K Street. Alyssa Marois, Sinema’s former legislative director, lobbies for HSBC Bank. Former Sinema policy adviser Kate Gonzales is a lobbyist at Brownstein Hyatt Farber Schreck whose clients include British private equity firm C5 Capital.

Sinema also insisted that the 15 percent minimum tax exclude companies that take advantage of accelerated depreciation — deductions that allow firms to pay a low tax rate when they make large capital investments, such as buying new equipment.

A last-minute lobbying blitz from manufacturers — which often lean on accelerated depreciation to expand their operations — appeared to shift Sinema’s position on the minimum tax, a proposal she voiced support for last October.

The Arizona Chamber of Commerce teamed up with the US Chamber and the National Association of Manufacturers to run ads pressuring Sinema to change course. Sinema privately asked business groups this week if the proposal was “written in a way that’s bad” according to the Arizona Chamber, CNN reported.

“Tell your senators and congressmen to say no to taxes that would devastate Arizona manufacturers,” one TV ad told Phoenix and Tucson area residents this week.

The stock buyback tax, which would reap tens of billions from the nation’s largest corporations, is the most recent proposal to draw criticism from big business groups.

“Unfortunately, the new excise tax on stock buybacks will only distort the efficient movement of capital to where it can be put to best use and will diminish the value of Americans’ retirement savings,” Neil Bradley, chief policy officer at the US Chamber of Commerce, said in a statement Friday.

Share repurchases by S&P 500 companies are on track to surpass $1 trillion this year for the first time. Large corporations make up the bulk of stock repurchases, and they’ve ramped up their buybacks in recent years to boost their stock price and reward shareholders.

Apple said in April that it would buy back as much as $90 billion in company stock. Last month, Morgan Stanley announced $20 billion in new buybacks, while Nike approved a new $18 billion buyback program.

Prominent Democrats have criticized the wave of buybacks that stemmed from the Republicans’ 2017 tax law. They say that companies should use their cash reserves to create more US jobs and pay their workers more.

Wall Street analysts said Friday that a 1 percent tax on share repurchases would likely slow down the buyback trend and prompt more companies to hike their dividends instead.

House Democrats included a 1 percent buyback tax in their $2.2 trillion reconciliation package passed last year. At the time, it was estimated to bring in $124 billion over the next 10 years, according to the Joint Committee on Taxation.

Sens. Sherrod Brown (D-Ohio) and Ron Wyden (D-Ore.) previously floated a 2 percent tax, arguing that buybacks benefit the wealthiest shareholders at the expense of workers.

“Corporate stock buybacks further enrich already wealthy CEOs and major shareholders while helping them dodge their fair share of taxes. They’re one more way in which corporations, billionaires and the other ultra-wealthy play by their own set of tax rules,” Brown and Wyden said in a 2021 statement released along with their legislation.

A write-up on the buyback tax included in the House-passed version of the Build Back Better Act by law firm Skadden Arps criticized the measure for being too broad. It described the language in the bill as “broad enough that the tax might be triggered by certain acquisitions, split-offs and other transactions.”

“If the provision is enacted as drafted, publicly traded corporations will need to consider the excise tax in weighing the overall costs and benefits of their stock repurchase programs and in evaluating other corporate transactions that may involve ‘repurchases.’ As a general matter, the excise tax would make it more costly to engage in stock buybacks of all forms,” the authors of the article wrote in 2021.


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